Economy

Bank of England says sterling recovery could help with inflation

UK rates unchanged at record low of 0.25%

The Bank of England last month dropped plans to cut interest rates again. Photograph: PA Wire

Thu Dec 15 2016 - 17:47

The Bank of England said on Thursday that sterling’s strong performance over the past month could soften an expected surge in British inflation next year as its policymakers voted unanimously to keep interest rates unchanged.

Officials saw a stronger global economy – and the chance of a further boost from the spending plans of US president-elect Donald Trump – but also warned of greater risks from Europe, China and other emerging markets.

The Bank of England kept rates at a record low 0.25 per cent at its December meeting which ended on Wednesday. It left its plans for government and corporate bond purchases unchanged, in line with forecasts.

Last month the Bank of England dropped plans to cut rates again and instead adopted a neutral stance for policy after conceding it had been wrong-footed by the resilience of the UK’s economy after the shock of June’s vote to leave the EU.

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On Thursday, Bank of England officials noted sterling had appreciated by over 6 per cent since its latest forecasts in November. Against the euro on Thursday, it was trading at 83.9p, having breached 90p in the aftermath of the Brexit referendum.

Overshoot

"This would by itself point to less of an overshoot in inflation relative to the target in the medium term, though month-to-month volatility was to be expected as market participants' views on the United Kingdom's future relationship with the European Union continued to evolve," the Bank of England said.

It also flagged signs of overheating Chinese house prices and lending, and concerns about Italian banks.

“We think the bar is high for tightening [Bank of England] policy in the current uncertain environment,” HSBC economist Elizabeth Martins said in a note to clients.

Sterling sank to a two-week low against the US dollar after the Bank of England's announcement. Traders said this mostly reflected dollar strength after the US Federal Reserve tightened policy for only the second time in a decade on Wednesday.

Some economists say the Bank of England would probably be following suit were it not for uncertainty around the outcome of EU exit talks which are due to start next year.

British inflation hit its highest rate in more than two years last month, though at 1.2 per cent it still remains below the Bank of England’s 2 per cent target.

(-Reuters)

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